FIN350- Questions and Applications

Chapter 1: Questions and Applications 2, 4, 8, 16, and 23

2. Types of Markets Distinguish between primary and secondary markets. Distinguish between money and capital markets.

4. Efficient Markets Explain the meaning of efficient markets. Why might we expect markets to be efficient most of the time? In recent years, several securities firms have been guilty of using inside information when purchasing securities, thereby achieving returns well above the norm (even when accounting for risk). Does this suggest that the security markets are not efficient? Explain.

8. Securities Firms What are the functions of securities firms? Many securities firms employ brokers and dealers. Distinguish between the functions of a broker and those of a dealer, and explain how each is compensated.

16. Comparing Financial Institutions Classify the types of financial institutions mentioned in this chapter as either depository or nondepository. Explain the general difference between depository and nondeposi- tory institution sources of funds. It is often said that all types of financial institutions have begun to offer services that were previously offered only by certain types. Consequently, the operations of many financial institutions are becoming more similar. Nevertheless, performance levels still differ significantly among types of financial institutions. Why?

23. Assume that countries A and B are of similar size, that they have similar economies, and that the government debt levels of both countries are within reasonable limits. Assume that the regulations in country A require complete disclosure of financial reporting by issuers of debt in that country but that regulations in country B do not require much disclosure of financial reporting. Explain why the government of country A is able to issue debt at a lower cost than the government of country B.

Chapter 2: Questions and Applications 3, 9, 11, and 19; Problem 1

3. Impact of Government Spending If the federal government planned to expand the space program, how might this affect interest rates?

9. Real Interest Rate Estimate the real interest rate over the last year. If financial market participants overestimate inflation in a particular period, will real interest rates be relatively high or low? Explain.

11. Impact of Stock Market Crises During periods when investors suddenly become fearful that stocks are overvalued, they dump their stocks and the stock market experiences a major decline. During these periods, interest rates also tend to decline. Use the loanable funds framework discussed in this chapter to explain how the massive selling of stocks leads to lower interest rates.

19. Impact of Economic Crises on Interest Rates When economic crises in countries are due to a weak economy, local interest rates tend to be very low. However, if the crisis was caused by an unusually high rate of inflation, interest rates tend to be very high. Explain why.Bottom of Form

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